Figuring
out a retirement income

Dear
Dr. Don,
I have a net worth of $3.5 million. I am 51 years old, own my home
and have no debt. I live in the Midwest so my cost of living is
much less than on the coast. If I retire now, what return should
I plan on from my $3.5 million in investments?
-- Chris Compounding

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Dear
Chris,You asked me what you can expect to earn on your
portfolio. That's the easy question. The hard question is how to
invest this money to meet your needs in retirement, from health
care to long-term care and living expenses, so you don't outlive
your money.

I'll make a leap and assume that all $3.5 million
is in investable assets that can earn a return even though that
doesn't have to be the case when calculating your net worth.

Net worth is simply an accounting of what you own
less what you owe to arrive at what's yours. Readers who want to
calculate their wealth can use Bankrate's
net worth calculator.

What you can plan on in income from your portfolio
depends on how you invest it. You could invest very conservatively
with little to no risk to principal and expect an average annual
pre-tax return of 4 percent to 5 percent, or take on some additional
risk by investing in common stocks, corporate bonds and other investments
and get higher expected average annual returns, let's say from 7
percent to 10 percent.

Paraphrasing Nobel Laureate William Sharpe, you can't
eat average compound returns. Expecting your portfolio to earn 7
percent to 10 percent doesn't keep you from losing money in any
given year. Simulation models can show how a few down years early
on in retirement make it that much harder to meet your income requirements
in later years.

If you're from the never-touch-principal school of
investing, you could invest in the 30-year U.S. Treasury bond, earn
roughly 4.7 percent pre-tax on that investment and make $164,500
per year in investment earnings, which translates into $13,700 per
month.

Put that money into an immediate annuity instead and
you could receive over $18,000 per month in income with a single
life annuity, with no beneficiary payments. There would be no principal
balance at your death, but you wouldn't outlive the income stream.
Tweaking the annuity policy to consider joint lives or a guaranteed
payment stream changes that number but still provides for a lifetime
income stream.

While immediateannuities.com can let you design an
immediate annuity that's right for you, provide you with a nonbinding
quote and no salesperson will call, I like Vanguard's no-obligation
quote on its Web
site because it also offers an inflation indexed annuity.

Whether your employer has retiree health care benefits
in place and keeps them in place until you qualify for Medicare
should influence your portfolio decisions, as will the need for
long-term care insurance.

Take a bigger-picture approach to managing your
retirement nest egg to make sure that it funds your needs for a
comfortable retirement. If I were in your shoes, I'd talk to a financial
planner and work on the big picture. An earlier Dr. Don column
talks about choosing a financial planner.

To ask a question of Dr. Don, go to the "Ask
the Experts" page, and select one of these topics: "Financing
a home," "Saving & investing" or "Money."